Production of crude oil averaged 250 barrels per day, with production from the Ukrainian joint venture up by 10 barrels per day and Trinidad production up by one barrel per day. In December 2003 the Company sold its crude oil producing properties in Canada that had contributed 38 barrels per day of production in the first half 2003. In the past 12 months the Ukrainian joint venture has not brought any new wells on stream so production volumes have temporarily stabilized. However, in August well 187b was tested at approximately 220 barrels per day (100 barrels per day net to Kroes) and will begin commercial production shortly. In addition, two more development wells will be drilled in the last half of this year.
Kroes President Fred Callaway said "initial production from well 187b is the best result the joint venture has had in the Lelyaki field to date and is very encouraging."
Average crude oil prices in Ukraine were considerably higher during 2004 at $40.10 per barrel but with stable production volumes and the absence of Canadian production, revenues in the first half of 2004 were limited to a modest gain of about 10%.
Second Quarter of 2004
Net earnings for the three months ended June 30, 2004 were $121,222 compared with $245,722 in the same period in 2003. Net earnings were $315,927 in the first quarter of 2004. Cash from operations was $139,803 compared with $261,919 in the same period last year and $392,029 in the first quarter of 2004. At year-end 2003 some 30,000 barrels of crude oil were in inventory that was sold in the first quarter of 2004. A similar inventory build-up occurred in the second quarter of 2004 with about 21,000 barrels on hand at June 30. These inventory changes resulted in relatively higher revenues, earnings and cash flow in the first quarter 2004, and relatively lower results in the second quarter 2004.
Development well 187b in the Lelyaki oil field began drilling in April and after drilling directionally to total vertical depth of 1,780 meters, the drill pipe became stuck while pulling out of the hole. This was a very difficult "fishing" job and four weeks were lost in the process, but following completion and a 7 day production test early in August, averaged 220 barrels of oil per day (100 barrels per day net to Kroes) and, as noted, is the best result the joint venture has had in the Lelyaki field to date.
An exploratory well, No. 191, began drilling in May and was intended to test the possible extension of the oilfield to the northwest across a major fault. Although the well encountered oil staining in the target P1 and P2 sands, the well produced only water on testing. The well which was plugged and abandoned, completed the joint venture's exploration drilling commitment under its license agreement.
More drilling will commence late in the third quarter as the rig from No. 191 will move to a new development well location No. 302 and another drilling rig will mobilize to drill location No. 305. These wells will be drilled on two structural highs in the central and western part of the field. Well No. 302 is being drilled into the central "high" and could encounter as much as 17.5 m of the upper P1+2 layer. It is anticipated that a significant portion of the gross pay encountered at these wells will be oil bearing due to the vertical displacement mechanism in the pool. Production rates for these wells could be in the same 200 barrel per day range as the recently completed well 187b.
On July 7, 2004 the Company received approval from the TSX Venture Exchange for a normal course issuer bid to purchase up to 2,045,600 common shares, approximately 10% of the Company's public float. The Directors have initiated this issuer bid, as they believe the current share price is well below the Company's net asset value. The normal course issuer bid will be effective from July 13, 2004 until July 12, 2005. Northern Securities has been retained to implement the share repurchase program on behalf of the Company. The repurchase of shares will be made at the sole discretion of the Company. At the date of this report, 148,000 shares have been purchased.
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